So often I hear people say:  “I just want a small business.”  And I say to myself:  “You just want trouble!”  I will tell you why.

1. One hour is 60 minutes, whether you get paid R100 or R1000.  The only difference is, that if you have to work 7 days per week at R100 per hour, you will soon resent it.  And there is not enough money to hire somebody to help you.  Or put in other words:  you don’t have enough money to buy some free time.
2. A small business does not have the cashflow to pull you out of trouble.  It is like this:  You have a business with a net profit of R5 000 per month and you pay that to yourself as a salary (bad idea).  But your personal expenses are R5 000 per month, so you don’t have a choice.  Then the weather changes and suddenly your turnover is less and therefore the net profit.  Or a piece of equipment breaks.  Or you have to buy more stock for a huge special promotion.  A small business just cannot carry the extra burden.  But imagine a bigger business where you had a net profit of R5 000 after your salary, in other words, a real net profit.  You can take a lot of bad things.
3. A big business has a much bigger margin for error – turnover has to drop substantially before it affects the finances.
4. A big business can handle variances much better.
5. All in all, a small business is riskier than a big business.  The same is true for motorbikes! 

Now I can almost hear some of you saying:  “But I can only afford so much!”  Believe me. I have a lot of sympathy.  But also believe me on this:  if you buy a small business, it will eat all you have and then some more.  And you will not even be able to afford anything else.  

Property?  Bigger is not better.  Business?  BIGGER is BETTER!

A couple of years ago I was looking at buying a filling station.  I saw an advertisement and phoned the agent.  We went to the site.  The station use to sell about 350 000 liters per month, but “because the last owner was no-good”, it was now only doing 90 000 liters.  There was no shop, no extras.  Just a couple of old pumps tended by almost dead attendants.  I said the price is too high and the agent referred me to the contact person at the oil company.

Now let me give you some background on the station.  Although the site is on a very busy road and very close to many industries, it is not a nice area – I would not allow my daughter or wife to work there, it feels unsafe.  For a long time it was the only station in the area, but I knew that another oil company opened a site a couple of kilometers away.  Theoretically the new site should not influence this one, but theory and reality is not always the same.

So I phone the contact person and asked him about the site.  His opening words were historical – the site did do 350 000 liters before and it could do the same again.  I reminded him that the site was doing much less and without an operator would do even worse.  He agreed with me.

Then we got to the price and I said I think they are selling the site as if it were doing about 180 000 liters, double what it is doing.  “Yes, you are right.”  “But why are you doing it?”  Says Mr Oil Company:  “But surely you realize the site has potential?”  “Of course I realize it, that is why I am interested.  But what you are asking me to do is to buy the potential, work very hard for long hours without any pay to realize the potential.  And only then will it be worth what you are asking for it.  In other words, you want ME to pay in advance for MY efforts?  I am not going to that!  In fact, you should pay me while I build up the site!” 

At this he laughed and said:  “You are absolutely right, I have never thought of it that way.  But it does not matter if you don’t buy, we will get somebody else who will pay our price.”

From time to time I drive past this site (even fill up sometimes) and it is definitely not doing close to 350 000 liters.  In fact, I would be surprised if it did more than 200 000.  If I did buy it (the first fool), then today I would only be able to sell it at 200 000 liters – I would never be paid for my own efforts!  I might even have lost everything I own, like the previous owner.  And I can testify to this:  I have never been able to find a second fool.

But always remember what Mr Oil Company said:  “We will find somebody who will pay our price.”  Just be sure that YOU are NOT that person. 

Be Wise, Buy Wisely.